As custodians continue to adopt zero-fee trading, advisors are likely to make greater use of exchange-traded funds, including for applications such as tax-loss harvesting and rebalancing, says a new report from Cerulli Associates.

That's because the eradication of fees has removed one of the major hurdles advisors faced when it came to including ETF products in their portfolios; namely, client fears about costs.

“Transaction costs in the past may have prevented advisors from taking advantage of tax-loss harvesting or strategic rebalancing opportunities," Matthew Belnap, a Cerulli analyst, said in a statement. "Zero-fee trades allow advisors to be more flexible and strategic in pursuing client objectives."

In the latest "Cerulli Edge-U.S. Advisor Edition" report, the firm noted that the rush to zero-fee trading by RIA custodians such as Charles Schwab, Fidelity Investments, TD Ameritrade and E*Trade is not only impacting direct investors, but also advisors who are looking to use ETFs as a component in their portfolios.

Surveys by the firm found that 27% of advisors did not allocate to ETFs in 2019, primarily because of client concerns about costs. That issue has virtually disappeared with the advent of free trading, which will likely lead to wider use of the products by advisors, the report said.

“There is substantial room for growth in the ETF space among financial advisors, and the race to zero will likely serve as the catalyst for increased adoption,” Belnap said.

Greater freedom to use ETFs will give advisors more access to niche asset classes and more opportunities to minimize client tax obligations, Cerulli said.

"As their focus turns upmarket—to high-net-worth clients—they will need to help clients plan for, and minimize, their tax burden," the report said. "Using ETFs instead of mutual funds, especially when they cover similar asset classes or market segments, promotes tax efficiency and can minimize capital gains."

The move toward zero-commission trading also dovetails with the advisory industry's increasing adoption of asset-based fees as opposed to commissions, the report said.

Cerulli noted that advisors now draw 69% of their compensaion from asset-based fees, with 25% coming from commission. Over the next two years, that's expected to change to about 75% asset-based fees versus 17% commissions, the report said.

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